When you use a debit card at a store, does it really matter how that money is transferred from your checking account to the merchant? Well, to the banks that issue debit cards and the merchants that accept them, it matters. A lot. A little noticed, but heavily lobbied amendment to the financial reform legislation will limit interchange fees (the small charge exchanged between the merchant’s bank and the consumer’s bank to cover the cost of accepting plastic).
If that’s not clear, here’s a handy chart explaining how the process works:
When you make a purchase, your bank has to settle with the merchant’s bank less a fee.
The growth of debit cards as part of the U.S. payment system over the past decade has been remarkable. According to the Federal Reserve Bank of Kansas City, debit card use increased 23 percent annually from 1996 to 2008 and accounts for more than a third of consumer payments at the point of sale. Merchants pay an average of about 1.75 percent and .62 percent for debit card authorized by signature and by pin, respectively. (Although the difference between signing and entering a pin is a meaningless distinction to most consumers, the difference between the ways the two transactions are treated by payment systems is a whole other issue). Although the percentages seem small, the fees add up, especially on larger purchases.
On May 13, the Senate passed an amendment to the financial reform bill, authored by Sen. Dick Durbin of Illinois, to reduce the fees charged on debit transactions, ensuring they’re “reasonable and proportional to the actual cost incurred.” The amendment also allows merchants to offer discounts based on their payment method, as well as set minimum dollar thresholds for accepting debit cards for purchases. Both practices are currently not allowed. Although the issue didn’t garner a huge amount of media attention, the amendment was heavily lobbied by merchants groups on one side and credit card and banking companies on the other, who each stand to gain or lose potentially billions of dollars in revenue.
The Merchants Payments Coalition, representing 2.7 million U.S, businesses, claimed that interchange or swipe fees represent the largest nonlabor cost for many businesses and are limiting the growth of small businesses. The MPC also argues that interchange fees, which represent $48 billion annually, inevitably inflate the cost of goods to consumers. The Electronic Payments Coalition, a group of credit unions, banks and payment card networks, maintain that retailers are just trying to shift the cost of accepting debit cards to consumers.
The language of the Durbin amendment was not in the House version of the financial reform bill, so it is not clear that the rules will make the final version of the legislation. But both sides are continuing to try to influence the debate with grassroots-style websites encouraging consumers to contact their representatives.
The MPC encourages you to reach out to tell their representative that “swipe-fee reform would save Americans [sic] consumers billions of dollars every year.” Meanwhile, the CARD Alliance or Consumers Against Retail Discrimination (a project of the Electronic Payments Coalition), encourage you to tell your Congressman, “I do not think it’s fair for consumers like me to be forced to pick up the costs of accepting debit for giant retailers.”
Assuming the Durbin amendment makes the final version of the financial reform bill and is voted into law, what does this mean for you as a consumer? Well, when you swipe your debit card at a register, nothing should really change: money will be taken out of your checking account. However, be prepared for retailers to set minimums (and possibly maximums) on what you can use your debit card for. There may also be discounts available for paying by cash or debit card, representing the differences that merchants pay for these transactions compared to credit cards.